Tax on Stock Options When You Leave a Startup
Most startup option plans give you 90 days to exercise after termination. Here's what happens to ISOs and NSOs, what tax is due at exercise, and how to avoid leaving money on the table.
Leaving a startup triggers a clock on unvested equity — those options or RSUs typically vanish — but vested options come with their own deadline. The standard post-termination exercise window is 90 days, and missing it means forfeiting vested options you earned.
Exercising inside that window means writing a check for the strike price plus taxes. For NSOs, the spread is taxable immediately. For ISOs, you may owe AMT on the spread even if the company is still private and the shares aren't sellable.
The tax and cash planning should start before you give notice, not on your last day.
What you keep vs lose at departure
Unvested options and RSUs generally cancel on your termination date unless you negotiate acceleration (single-trigger or double-trigger) in your agreement.
Vested but unexercised options stay exercisable for the post-termination period in your plan — often 90 days for ISOs, since IRC §422(a)(2) generally requires exercise within three months of termination to keep ISO tax treatment. No plan design can extend that statutory deadline. NSOs sometimes get longer windows (e.g., 7–10 years) depending on company policy.
Check your option grant agreement and plan document. Extended exercise windows may convert ISOs to NSOs for tax purposes after 90 days.
The 90-day ISO rule
IRS rules require ISOs to be exercised within three months of termination (90 days for employees) to retain ISO status. After that, exercised options are treated as NSOs for tax purposes even if the company lets you exercise later.
If your company offers a 10-year extended window, the extra time is valuable for liquidity but ISO benefits may be lost on options exercised after day 90. Model both scenarios: ISO with AMT vs NSO with ordinary income at exercise.
Special rules apply for disability or death — longer exercise periods may preserve ISO status.
Tax due when you exercise before the window closes
NSO: Spread taxed as wages. You'll need cash for strike price + ordinary income tax + FICA. No sale means no liquidity unless the company runs a tender offer or secondary sale.
ISO within 90 days: No regular tax on spread at exercise, but AMT applies on Form 6251. Budget for federal (and possibly state) AMT payments due the following April.
If FMV equals or is below strike price (underwater options), exercise is usually pointless — you could buy nothing for less. Underwater options are often left to expire.
Cashless and net exercise options
Private startups rarely offer cashless exercise. Public companies may allow same-day sale to cover strike and taxes.
Net exercise (cashless at the company level) lets you surrender a portion of shares to cover strike price and sometimes withholding. You receive fewer shares but need less upfront cash.
If your company doesn't offer net exercise, some employees use personal loans or secondary market sales (when permitted) to fund exercise. Factor interest and risk into the decision.
Planning checklist before you quit
Request current 409A valuation and exact vested share count. Calculate spread × shares for NSO ordinary income and ISO AMT.
Confirm exercise window length and whether ISO status survives past 90 days in your plan.
Estimate total cash needed: strike × shares + tax liability. Compare to realistic liquidity timeline (IPO, acquisition, tender offer).
If exercise isn't affordable, understand the expiration date — walking away may be rational if spread tax exceeds expected value of the shares.
Key takeaways
- Vested options usually must be exercised within 90 days or you forfeit them.
- ISO status generally ends 90 days after termination unless special rules apply.
- NSO exercise triggers immediate ordinary income tax on the spread; ISO exercise triggers AMT.
- Run the cash and tax numbers before giving notice — not after your last day.
This guide is for general education only and is not tax, legal, or accounting advice. Rules change, and your facts matter. Talk to a qualified professional before filing or making equity decisions.
Related guides
ISO vs NSO Tax Differences
Incentive stock options and non-qualified stock options follow different tax rules at exercise and sale. Compare ordinary income, capital gains, and AMT treatment side by side.
AMT from Incentive Stock Options
Exercising ISOs can trigger alternative minimum tax even when you sell no shares. Learn how the spread hits Form 6251, how much AMT you might owe, and how the AMT credit works.
Do I Owe Taxes If My Startup Stock Is Illiquid?
Illiquid stock doesn't defer tax. RSU vests, NSO exercises, and ISO AMT all create bills before you can sell. Here's when tax is due and how people fund it.